IMGCAP(1)]The recent financial crisis reminded us that financial reporting still needs improvement.
The need for more transparent financial information and financial statements that better reflect economic reality is on the minds of standard-setters, policy makers, and investors.
The interconnectedness of the world’s capital markets has changed the perspective on financial reporting. We continue to see the movement toward International Financial Reporting Standards as a basis of financial reporting globally. The increasing use of IFRS around the world has and continues to impact how accounting and financial reporting standards are developed, written, and applied here in the United States.
Last February, the Securities and Exchange Commission issued a formal statement supporting the convergence efforts of the Financial Accounting Standards Board and the International Accounting Standards Board, and the movement to global accounting standards. It also directed its staff to execute an “IFRS Work Plan” to address issues related to the incorporation of IFRS into the U.S. financial reporting framework. This follows the proposed “IFRS Roadmap” that was issued in late 2008.
In October 2010, the SEC staff issued its first IFRS Work Plan progress report, which marked a major milestone on the U.S.’s journey toward IFRS. What may be viewed as the capstone on the path to IFRS is expected later this year with the SEC’s decision on the next steps. This decision will be informed by the continued progress on the IFRS Work Plan and the completion of the IASB’s and FASB’s convergence agenda later this year.
The Path to IFRS in the United States
The convergence efforts have been underway for over a decade now, with both FASB and the IASB redoubling their efforts and reiterating their commitment to convergence in the last couple of years. The boards are working jointly on several projects—revenue recognition, leases, and financial instruments, among others—that would significantly change the U.S. and global financial reporting requirements.
[IMGCAP(2)]There is some confusion about the purpose of convergence, though, which is not necessarily to make U.S. GAAP and IFRS identical. Rather, convergence is designed to improve the quality of financial reporting and more closely align the two sets of standards by arriving at similar general principles.
The October progress report and recent public commentary may provide some insight into how the Commission could move forward with IFRS implementation in the U.S. Using the standard-setting process may be a key to this decision. Keep in mind the goal is a single set of high-quality globally accepted standards. This could be accomplished by modifying U.S. GAAP to “incorporate” the “lingering” differences between IFRS and U.S. GAAP via the standard-setting process.
This would be done over some period of time following completion of the convergence agenda. U.S. GAAP would still exist, but it would essentially become IFRS. This approach is different than “convergence” because, at the forefront, it seeks to get rid of divergences between the two sets of standards. Then, as new IFRS standards are introduced, there would be a process for FASB to “endorse” them and bring them into U.S. GAAP.
Because “incorporation” through standard-setting is geared toward eliminating the differences between IFRS and U.S. GAAP, it could facilitate full recognition of IFRS’s benefits, while simultaneously addressing some of the concerns that have been raised regarding the implementation of IFRS. Beyond alleviating certain of the challenges associated with outright IFRS “adoption,” incorporation addresses issues such as FASB’s future and the U.S. maintaining control over the standard-setting process.
It is also possible that the Commission could permit voluntary adoption of IFRS by certain companies, such as large multi-nationals, before the incorporation process is complete, allowing them to benefit from IFRS sooner.
As the boards continue to work through their agendas, what’s important is the stability and transparency of the global standard-setting process, and how national standard-setters like the FASB may play a role in that process once IFRS is incorporated as a reporting requirement.
What’s Next and How to Plan for It
Like children on an extended car trip, many in the U.S. are asking, “when will we get there,” as it relates to IFRS. This year should bring some level of clarity as FASB and the IASB complete their convergence agenda and the SEC determines the next steps on IFRS.
While the SEC has not outlined a definitive timeframe for when IFRS might be incorporated into the U.S. financial reporting framework, it has indicated that it could be by 2015 or 2016. That may seem like a long way out, but because of the need to present comparative information and the large volume of changes coming to both U.S. GAAP and IFRS, most companies are already considering how to deal with the movement to IFRS and other U.S. GAAP changes resulting from convergence efforts.
Whether it’s a new “converged” U.S. GAAP standard or IFRS, it’s important to keep in mind that the impacts are not just about accounting. Considerations should include not only the readily apparent implications such as those related to accounting, internal control, staffing and expertise, and statutory and internal reporting, but also less apparent implications in areas such as technology, tax, contracts, debt covenants, and internal and external communications. Given the broad implications, personnel both inside and outside of finance and accounting will need education and training.
The board and audit committee should understand how management will address both the new requirements and incorporation of IFRS, and facilitate consistent application. Understanding the process around judgments, including how the substance of transactions is assessed and the objectivity of assumptions used, as well as the reasonableness of final judgments, will be important.
Although the last few years have been chaotic when it comes to financial reporting and many new requirements are on the horizon, this year should bring some clarity on the SEC’s next steps for incorporating IFRS into the U.S. financial reporting framework. Strategic planning now—with oversight from the board and audit committee—can help companies successfully navigate the changing financial reporting landscape and the journey to global standards.
Robert J. Kueppers is deputy CEO of Deloitte LLP, and D.J. Gannon is a partner at Deloitte LLP.
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